Myth: Speculators don’t take “delivery” of a commodity so they only want the price to go higher.

Fact: There are concerns about speculators that don’t take “delivery” of oil. Since commodities have been traded, few speculators ever take delivery. A small majority of contracts are delivered, but all participants want the threat of delivery so the futures price replicates the underlying commodity. The futures market is an efficient way to discover what the actual price should be. A centralized marketplace lowers transaction costs. Speculators are not taking delivery and hoarding oil to keep it off the market and artificially increase the price.

Myth: Speculators are making prices in oil higher for consumers.

Fact: High prices in the oil market have nothing to do with speculation. Demand for oil is “inelastic.” People will pay about any price for oil relative to other commodities. Increased worldwide demand is the cause of price increases. The United States cannot control this demand. Refusal to drill for more oil has constrained supply growth. America has not developed nuclear, wind, solar, or any other types of energy. Because demand has grown with restricted supply, prices have nowhere to go but up.

Conservation is nice, but only higher prices will influence conservation and demand. If we agree conservation is “good,” we can use “positive economics” to encourage it. Increasing taxes on consumption will effect change. Regulations like CAFE standards mean little. We can talk about conservation all we want, but until prices go up, we won’t use less. Lack of refining operations has created a bottleneck on supply. This unintentionally increases the price of energy. Without the ability to turn new supplies into a useful product, we still will have a problem. Lack of refinery capacity causes “whip” in the supply chain for oil. Whip in production increases costs and increases prices. America hasn’t let the oil companies get control of supply chains because it has limited the amount of energy they could get, as well as their capacity to turn it into useful products. We need to end this limitation.

The biggest myth of all is that if the government limits speculation, prices will go back to “normal.” That is far from the truth. It will still occur, but in unregulated places, like unregulated over-the-counter as well as foreign markets where we have little control or oversight. Oil prices will still be set by supply and demand. Businesses and consumers will pay an even higher price, because speculators and liquidity were driven out of the market by federal fiat. Oil prices have dropped in the last few days due to developments in the marketplace, not because of federal action. The solution does not lie with shooting the messengers of price discovery — the speculators.

Jeffrey Carter is a former member of the Board of Directors of the Chicago Mercantile Exchange, and has been a “speculator” — independent trader — since 1988. He holds an MBA from the University of Chicago and blogs at www.pointsandfigures.com.

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It’s easier for the politicians to attack the free markets than for them to do the heavy lifting of increasing drilling and defending the U.S. dollar. Gas prices would be 50 cents per gallon lower today if the dollar had been stable over the past 18 months.

Whether it’s oil speculation or home mortgages, the politicians think their meddling in the market will “help” consumers. Usually, they either just make things worse immediately or postpone dealing with a problem until it’s effects are much worse than they would have been without intervention. Most of our politicians have little appreciation for how well free markets work. Unfortunately, this statement applies to our President, who’s now agreed to sign the “risky mortgage bailout” law, and our Presidential candidates, who have their own set of market-tinkering recommendations.

I agree that speculation is not the cause of high gas prices, but I’m wondering whether speculation adds to the cost, sort of like a surcharge on top of the price of a commodity. If you say that the lack of wiggle room between the supply and demand creates an inelastic situation, wouldn’t speculators know that and assume prices will rise? Assuming that, wouldn’t they act on that and thus cause prices to rise even higher immediately by betting on higher prices in the future? I guess I’m wondering whether or not that causes prices to rise immediately instead of rising later just based on supply and demand.

Mr Carter actually understates the value of what he and his speculator colleagues do.

The recent spike in oil prices is an extremely important message that a true crisis in the supply/demand balance is on the way. If the message is received and acted upon, most of the crisis can be averted. (And of course the speculators who bet that it is inevitable will lose big bucks.)

The innumerate enviros and anti-energists and their political shills do not like this message, so, in time-honored fashion, they say “shoot the messenger.” They think that then they can continue to live in a fantasy world.

Speculators force all of us to mark our fantasies to reality. So thank you Mr. Carter.

oil rich countries like russia, venezuela, ME are the most totalitarian, with NO TRANSPARENCY whatsoever

they are laundering criminal money in numbers of 100s of billions or even trillions.

Those are all known facts, i know from ukrainian sources about the laundering money in Venezuala by BEST FRIEND OF BILLI THE CLINTON, ex-president of Ukrainian LEONID KUCHMA and his gang

With unlimited flow of oil it is very easy to do:

You bring your illegal money to CHAVEZ THE PIG-MAN, he gives you
an oil pumping contract with fake figures under a non transparent regime: and VU-A-LA : you get that oil and sell it on the market, may be even in the USA. And in a couple of month or at any needed time you put in a legal western bank “the profit” that you actually made through drug trafficking or state budget of Ukraine siphoning.

The same goes on an unlimited scale in russia and all over OPEC.

Schemes are complicated, but the essence is depending on non-transperity

So if you want to increase oil price and you have lots of dough already: you invest it in a fake networks of traders and start buying your own oil.

Author claims in a POP-CULTURE article that DELIVERIES are transparent.

I don’t believe this claim at all.

With 85 million barrels of oil sold daily – we must check on every tanker, every pipeline, in all the world oil terminals, half of witch are located on the territories controlled by very professionals criminal cartels merged with the terrorist states and their gangster special security services

In the last month I’ve heard witnesses saying that on several ports in Russia , Ukraine where oil is passing thru security was tightened and enforced with new weapons, that additional rail tracks are build on the vital routs and so on

it is not just naive but may be not accidental that articles like this appear in times like this.

Regarding supply/demand formula: in the oil market it never worked

oil market is controlled by cartel and is anything but free

demand in USA, a number one consumer of oil in the world went down

in some areas down 20%

people drive less, people drive more carefully, fly less, boat less and so on

just by driving carefully you can easily cut your gas spending by 30%

Please don’t give us the supply-demand in oil markets story: it does not work

oil market this year will probably reach 4 trillion dollars

having the support of factor on the level of russian nuclear arsenal that is several times bigger then the American one -

Technically, speculation is aiding in a more efficient pricing of the cost, and if it doesn’t, it collapses very quickly. There is no “speculation premium” imputed into a price – speculation signals the actual price based on forward-looking conditions. In that respect, speculation is nothing more than the market signaling its expected future price given what’s expected to happen — completely inept Congresses refusing to do a damn thing to help permit drilling, refineries being blocked, shortages in corn and soybean supply due to too much rain, global uncertainty with a soon-to-be nuclear Iran, increasing global demand from China, Indonesia, Malaysia and India markets roaring, etc.

If you replace “speculation” with “forward-looking price” it will help resolve some of the intentional confusion Harry Reid and other disingenuous persons have been spreading. Actually, when an airline sells tickets for a plane flight, it is speculating on actual future demand for those seats. It often overbooks, speculating that not everyone will show up and demand will be slightly less than what has been signaled through the initial orders.

Often, this works and the airline has reduced the risk of flying with 15% less passengers due to the expected last-second cancellations. They’ve provided passenger liquidity and have hedged their risk. Had they been prohibited by Congress from speculating on the market for seats, they would have no choice but to pass that cost directly on to you. Curious, how speculation is always bad when it’s someone else, but it’s ok for an airline CEO, or for that matter, all of us.

I’d love to see Congress ban speculation outright, and see how long they survived until they were run out of town. We all will be given our gas day and time, and will be required to fill up to capacity when we purchase, at the station designated by our local officials. No more speculating that the price will be more or less tomorrow, or that it will be less if we drive a little further to a different market! Stocks will all be required to have exactly a return based on the adjustment for inflation. Nothing more. Credit cards and loans may not speculate that riskier parties will be less likely to pay, so we will allow all card issuers to only charge the current inflation rate (to simplify, we will declare it to be 2% annually since Senator Reid and Rep. Pelosi don’t like risk and uncertainty). You will not be permitted to sell your house, car or goods for more than the inflation-adjusted cost of acquiring or producing it. Minimum wage is sufficient for all because employers will be prohibited from speculating that one worker they have interviewed may be capable of providing greater productive return than another. We may even need to eliminate all sports, as it is inappropriate to speculate that by playing a game, the future outcome may indicate that one is better than the other (and we all know what gambling is… speculation on an outcome!).

Taken at their word, Reid and Pelosi are clueless fools for believing uncertainty and risk can be decreed away by the will of their pen. Then again, they practice this very faith in their approach to Iran, global warming, gun control and every other matter.

The author says, “Oil prices have dropped in the last few days due to developments in the marketplace, not because of federal action. ” Would you care to expand on that statement? Did the market suddenly discover large supplies of petroleum or did usage suddenly drop 20% or was “peak oil” finally debunked?

I submit that none of these events occurred. I submit that the speculators blinked and bailed. I hope they got caught in the squeeze real good.

Speculators are those who invest in commodities that they have no intention of ever consuming. It distorts the law of supply and demand by creating artificial demand. The author is obviously a shill for this business and should be tarred and feathered along with the rest of them.

I submit that none of these events occurred. I submit that the speculators blinked and bailed. I hope they got caught in the squeeze real good.

Speculators are those who invest in commodities that they have no intention of ever consuming. It distorts the law of supply and demand by creating artificial demand. The author is obviously a shill for this business and should be tarred and feathered along with the rest of them.

Talk about missing the point, or did you even try to understand the point, given that you probably believed anyone defending speculation was a “shill” before you read the article. We’re all very impressed with your ability to sling epithets, but do you have any actual analysis to back up your conclusions? Simply citing volatility as “proof” that something is amiss in the market is naive at best and intellectually dishonest at worst. Volatility in expectations for future demand is inherent in any forward-looking activity. Sometimes it benefits those who want the price to go up and sometimes it benefits those who want the price to go down.

To suggest as you do that congressional oversight keeps markets in check is absolutely laughable. First the Republicans don’t want to oversee any regulation, and the Democrats want to regulate everything, but never intend to look back to see what happens.

As noted above, however, oil distribution is largely controlled by a cartel. How did you come to believe it is controlled by market forces that you believe prevail in so-called free markets? And if that’s the basis of your argument, then your argument is pretty much worthless.

Scott (in Colorado): What part of “zero sum game” don’t you understand? Perhaps you’ll be comforted to know that it means, approximately, that half the traders lost money: for every dollar gained, someone else loses a dollar.

Perhaps a slow re-read of the article would clear things up for you as to who really deserves the tar *coughReidcough* and feathers *coughPelosicough*.

The point about the recent sudden drop in priced is valid. It dropped because the expectation of future prices dropped. That expectation is what speculators trade in. Contrary to the author’s assertion, one reason it dropped was the news showing that the demand was not inelastic.

Speculators indeed can move commodity prices, and provide false price signals which change the spot prices. Has the author forgotten the various asset bubbles of the last decade? There is every reason to believe that part of the price of oil is bubble behavior by speculators.

However, the author is of course correct that speculators provide needed liquidity. Furthermore, speculators cannot sustain a long term artificially high price – only a short term spike. Reality in the spot markets is forced to appear at some point, ending unrealistic expectations driven prices. Furthermore, speculators can just as easily bet that prices will go down (and that bet sends a down signal) as that they will go up.

If you don’t understand the liquidity issue, take a look at the options chain on USO (an oil tracking exchange traded fund). You will notice that the contracts with more open interest (contracts held) have a smaller bid-ask spread. As pointed out by the author, that spread represents a friction (unnecessary cost) to actual users of the commodity (“hedgers”). Hence the activity of lots of speculators reduces that friction by narrowing the bid-ask spread.

Government attempts to mess with these price signals are almost always counterproductive.

The current fuss about speculators is driven by Democrats who are between a rock (environmentalist stubbornness) and a hard place (the obvious need for more petroleum). The airlines are adding to it because government pressure can cause the prices to go down artificially, effectively creating a subsidy for the airlines.

I want to chime in as I simply don’t understand the explanation as a defense. And that’s not to say that I’m supporting Reid and Pelosi or more regulations or fail to understand terms like “zero sum game”. I have no problem with markets or speculators. I don’t care if one wishes to speculate on oil or real estate or pan for gold if that’s their speculation game of choice. But I fail to see how increased speculation is not complicit in the rise in the price of oil. I’m a complete layman in the world of finance but am I wrong in thinking that increased speculation drove the price of tech stocks higher a few years ago, increased speculation drove the price of real estate more recently and over the last few years increased speculation has driven the price of oil upwards? Certainly there were factors fueling the speculation and root causes driving the costs up as well, but it seems disingenuous to deny increased speculation plays no part.

Contrary to the author’s assertion, one reason it dropped was the news showing that the demand was not inelastic.

I have been hearing anecdotes to this effect for a while, too. People aren’t driving across town to save $3 on laundry detergent any more because it will cost them $3-plus in gas or they’ll cook at home rather than go out. The marginal uses of oil will definitely decrease as price goes up, just like people will put on sweaters in the winter while at home, rather than raising the thermostat.

How to understand futures? You have a product, which could be corn or gasoline. You also have people who own it commercially such as processors or farmers. These products have large price swings which make it challenging to do business. The commercial users of the product are experts in managing the product. Ideally they would merely do their business and take a commission on the work they do on the product. But because of the price swings they have to guess at the quantities of their product that will be needed in the future. This guessing is quite risky: a badly wrong guess can send a business into bankruptcy.

Enter the speculator. The speculator does no farming or refining; he merely spends his time trying to forecast price trends. Because of the special knowledge he has or thinks he has, he is willing to take on risk in the hope of making a profit. So the farmer or oil producer sells its product to him well in advance of actually producing it. As the owner on paper of the product, the speculator is exposed to all the price swings–all the risk–that affect anyone who owns the product for a long time.

So it’s a division of labor that allows the producer to concentrate on his business and lets the speculator take on most of the risk. What effect do futures markets have on prices of the various commodities? Overall, since futures markets make the producers’ businesses more even-keeled, the fact that they exist encourages producers to produce more. That is, futures markets, overall, tend to make prices go down.

There may be brief periods where speculators move the contracts up or down, but if their moves are not confirmed by market conditions, their information, or misinformation, will quickly be arbitraged away.

If, as has been argued by several others here, that speculation creates a more efficient market, then “bubbles” would never exist. Yet speculative bubbles do exist, and when the bubble bursts those so-called free markets are in free fall. And their preferred solution is to run to government and taxpayers for huge bailouts. So much for “free” markets.

That may be an “efficient” market for those at the top, but that’s not within most people’s definition of the word.

What part of the author’s bio did you guys miss? “Jeffrey Carter is a former member of the Board of Directors of the Chicago Mercantile Exchange, and has been a “speculator” — independent trader — since 1988.” Sounds like one with a vested interest in the business to me.

I am a free market supply-sider for those of you wondering about my economics. What’s happening in the oil market in anything but that. I’m still waiting for one of you gurus to explain how the recent volatility is caused by anything other than big money moving in and out of the oil markets.

Those who suppose that this is a zero-sum game are apparently not paying much attention at the gas pump.

To “The Outfit” – efficient markets are not perfect, they are just usually better than the alternative. Recent research in economics has shown that people are far from purely rational in their market behavior. Human beings make decisions partly based on fads (pack behavior). Thus, they will participate in bubbles (the herd is buying so I should buy too). Other human beings will spot that herd behavior and bet against it, making money.

you seem to forget ~oil for food program~ that was used to siphone 120-150 billion, from which 25 bil at minimum was never recovered from venezuela and alike

when you have a huge cash reserve, especially when you have a huge undeclared reserve of big money that is hardly tracable to you-
and this is ewxactly the case of oil cartel and russian-venezuelan-iran mafia:

you can move BIG money into market under different scenarious

in simple words: you buy your own peroduct under a name of a different trader

Saudis, Russians, Chinese and their partners have enough free cash for this kind of operations

SAUDIS also corrupted Washingtoin to the unprecedented degree, so
ANY POSSIBLE OVERSIGHHT IS DIMINISHED COMPLETELE

80 mil barels are sold daily, lets say at the proce of $120:

we have 9.6 billion sales DAILY

and HUGE demand. In this situation when demand can always eat another million of gallons one can either withhold it, but that will create attention,
but if you buy your own oil for 120 million : you actually influence a price

dont tell me saudis dont have resouirces for this:

this is exactly one of the factors of price inflating and no doubt it is used

People from Set America Free coalition came to exactly the same conclusions

And no body will be investigating this EVER

There is NOTHING stronger in this world then OIL CARTEL in close union with russian nukes

Speaking of (objective) reality, such as supply & demand, if cartels could control it, then oil would be at $200, $300 or even more per barrel. I mean, if you’re a god who can control reality, why settle for a measly $140?

Those who think they can wipe out reality by wiping out those who carry it’s meassage wind up themselves getting wiped out by reality.

The problem is not speculation but excessive speculation. Excessive volatility in commodities is bad for everyone and it is just not oil. It is natural gas, rice, corn, wheat. The airline and trucking industry is hurting even though the oil shortage is non-existent. Oil inventories compared to last year or the year before are stable. The only year we had a real shortage was in 2003 but oil never went to $147.

If you pump $275 billion in a stock, it’s price is going to go up no matter what it’s worth. It the same thing for oil. Some say it’s the dollar, The value of the dollar has dropped about 30% the last 8 years but the price of oil has increased 697%. So where is the correlation.

Phil Flynn, senior trader at Alaron Trading Corp. in Chicago this past week said “Crude inventories are falling because refiners don’t want to buy it at these high prices, not a shortage of supply.” He was not saying that earlier in the year.

So can you define “free markets?” The textbook definition does not exits anywhere on this planet. There is not a buyer or seller in official standing at the WTO. It is a body of governments, yet that body determines all the rules of world trade.

Why do people insist on using a term that went its way long ago. And even then there was never a market that existed without government intervention. Laissez faire economics has always been a myth.

The alternative is already present. It’s called managed markets. Some nations manage less than others, but it is all managed when the rules are established by governments.

Steven Brockerman:
Why not at $200? Are u seriously asking? I think you can figure it out: public will react unpredictably. Methanol industry will be build in 1 month (by the way the total cost to switch ALL TRANSPORTATION NEEDS OF USA TO METHANOL is less then 1 year of oil imports we pay for)

$140 made people crazy enough. Also cartel can go step by step:

1985-86 minimum of oil price. Russia goes bankrupt, what they do: the blow up Chernobyl to put a serious obstacle to nuclear energy in Europe, germany was numer one target.

1998-99 history repeats, kremlin team comes up with idea of terror attack on USA and other measures: North Korean ballistiv missile, Iran disturbance. In 2003 right after Korean missile test oil starts climbing again

John Moore:
>people are far from purely rational in their market behavior

It is ONLY BECAUSE OF NON-TRANSPARENCY ISSUE
Oil market is not free and is at 90% criminal.

mockmook:

there is enough evidence in the past to oil hoarding: Russia was buying Sadam’s oil at the level of up to 100 million barels totally.

How couild oil for food become a siphon of 120 billion? Thats how.
————-

I am sure that the major reason is a threat of Iran war which will cut ALL gulf exports for some time. And this is just the minimal negative consequence that will come out of it.

Dollar drops because of different rteasons, but inflation in USA is one of the lowest in the world.

We have ALL currencies going down.

If you read Anatoliy Golitsyn: he describes this situation exactly as a commodity withholding before a major war will unveil.

What are the most important industrial coomodities:

oil, n-gas, strategic metals.

Where are they? At the territory controlled by enemyu mostly and in the territories that enemy gets more control of:

I love how people who aren’t speculators are telling a speculator how markets work! What if he showed up at McDonald’s and told you how to mop the area around the fryer?

I’ve been trading markets for almost 15 years and I’ve been trading oil the last few months because that’s where the action has been. Never once has anyone forced me to take a particular trade, so tell me again how markets aren’t “free”? I have been “free” to make every trade I’ve ever wanted, provided I had the capital. Anyone with a few hundred bucks could hedge your entire risk from rising gas prices by buying some call options on the ETF USO, mentioned above. But you losers would rather p*ss and moan about it because that’s what losers do. That, and run to the government to save them from the bad men.

Regarding the new report by the U.S. government task force on OIL prices I say “wrong again”. It’s not supply and demand. Their study is biased to say the least and exactly what I expected to hear from Washinton and the CFTC. Many other experts are saying that normal market fundamentals could never explain the wild fluctuations in the price of oil. Here are the facts. In the year 2000 only 9 billion dallars was invested in OIL futures and now there is 250 billion dollars in oil futures. That’s a thousand percent increase. The price of OIL doubled in one year but demand didn’t double in that same time period did it? Even the IEA (International Energy Association) has graphs that prove supply and demand are evenly matched. Saudi Arabia says oil is over priced. Oil futures have been artificially inflated in value by commodities traders for weeks. Traders like Goldman Sachs and Morgan Stanley are making a fortune. I think new regulations are necessary. I find it interesting that billionaire financier George Soros calls this OIL phenomena a Bubble when everyone else sees a sharp spike in oil prices. He says he believes there are lots of bubbles building in financial markets, and in OIL. To quote him he says “He believes better regulation is necessary to keep commodity prices at more reasonable levels.” That’s what I have also been saying. I firmly believe there needs to be safety controls in place to prevent greed driven spikes in prices on the commodities exchange the same as there were safety controls implimented after the great crash of the Thirty’s to prevent a bottoming out of stocks. The government needs to step in now and do something about commodities trading. First of all, OIL and Gas should not be traded like poker chips. The consequences of a mistake are far too grave. And it’s a big accident waiting to happen. Look whats happening in Europe now with strikes and protests etc. Imagine if the same thing happened here. To help make my point imagine if we traded wheat commodities and wheat jumped 100 percent so traders all jumped in and bought more driving the cost up even higher… soon the whole world would starve because wheat prices would skyrocket. There are probably controls on wheat trading so this can’t really happen but what about oil. Can Investors drive the price up indefinitely? What controls are in place to prevent a huge spike in prices on the NYMEX. Oil is a key commodity and it’s basic for the proper operation of commerce in America. For investers to gamble with this commodity in Futures speculation is very irrational and irresponsible.. It’s a big game to them… but if the rules of the game are flawed then accidents happen. I am refering to the ENRON LOOPHOLE, SWAPS LOOPHOLE, and LONDON LOOPHOLE. A huge spike could take prices through the roof and this would not be good for for anyone except PERHAPS for the speculator involved. When fear, greed and suspicion surround an activity what does that tell you? The commodities market needs a good overhaul to bring some credibility back into commodities trading. New regulations are necessary because a huge greed driven spike in oil can cause fear among other investment sectors that are adversely affected by high oil prices. That fear would trigger a market reversal of grand proportions that would far out-weight any gains made by oil. These high prices are not sustainable and jeopardise economic growth globally, The price is inflated far above it’s true value which is probably closer to 80 dollars a barrel. Visit our website and take part in our gas poll on. We asked who’s to blame for high gas prices and got some very interesting results. Over half of respondence say they blame speculation for the problem.

Speculative bubbles do in fact exist and they roll through sectors of the financial markets every few years. That is because many of the people making the bets are NOT investors, but are truly, in the understanding of Graham and Dodd, SPECULATORS. I work in the financial services industry as an equities’ analyst, so I know what I’m talking about. I am somewhat old fashioned in my approach, as I tend to favor value investing, but that style requires a lot of patience and research. You take a position long before the asset is fully valued, and you get out when the crowd starts coming through the door, selling your shares to them as they enter. These are people who are mainly momentum players: they are betting that prices will continue their current linear trajectory, without consideration of the intrinsic value of the asset.

In the late nineties there was a speculative bubble in the tech sector and the dot.com’s. It burst when valuations were unsustainable. Before that, in the late eighties, early nineties there was a speculative bubble in bank stocks and real estate. That one burst too. And we just recently had a speculative bubble in the housing sector – the bursting of that bubble was painful and we are still seeing this problem unwind.

It is true that oil’s demand is more inelastic than that of housing, but not absolutely inelastic. You have Morgan Stanley analysts and managers “talking up” oil in recent months, saying that it should go to $200 per barrel and upwards. A substantial part of their business right now is funneling a load of cash into the hot sector: commodities. Is there demand for commodities? Sure. But all that cash chasing oil, gold, and grains does push the market prices beyond intrinsic value.

I agree that we absolutely have to reject the Democratic Party’s “energy policy” – which is nothing more than appease the environmental lobby and slip in Kyoto’s penalties through the back door. They have no plan to increase the supply of energy, except for the methane emissions coming from their guts that are supposed to pass for rational policy. They talk about “renewable sources” as if these will seriously replace very large parts of the grid within a decade or two. They have no plan for the interim. In the short-run, you can only conserve and adjust and absorb the pain. In the long term (30+ years into the future) you can do research into these “renewable” sources. But what about the intermediate term? They have nothing to offer, except more pain and economic stagnation.

I think we should do everything, but that has to include more drilling for the fossil fuels we have access to in our own country, onshore and offshore.

I just wanted to add one more point to my above post. I do not believe in the strong version of the efficient markets hypothesis. Obviously Mr. Carter and some of you do believe in the strong version of the EMH. I believe that inefficiencies, upside and downside, exist in markets. I do not believe that current market prices for oil truly are efficiently priced. Speculation does play a role in this, but I also think that the markets for oil, as they are set up, do provide necessary liquidity to the market. Is it always a rational mechanism? Debatable, but I see no better model that would work.

transportation energy agent that is easily can take place of oil is methanol

if we push this process by legislature as the flex-fuel mandate we can create a real free market situation in transportation fuel

i tend to analyze things practically:

today my transportation choices are limited, i know what changes are beneficial to me: I WANT THEM TO HAPPEN:

I want my car to be able to burn alcohols. Even if the war starts- i will be able to produce it at home.
I want bicycle lanes separate from the car lanes: i will byke all around the city fast and without fear of been hit by the car

I want to put a wind mill where i live without local corrupted officials demanding me to go thru licensing: my mill will not be doing anything bad to no one. Just turning in the air and making electricity for me.

I want to build a methanol plant on the Land fill in new Jersey

I am not sure that i will ever get a license for that either

So : we live in a NOT FREE SOCIETY where socialists prevent us from having real free market and development of our potential:

our freedoms to move, to build, to enterprise ARE LIMITED so we have this financial NON TRANSPARENT rulers dictating the rules:

i can not compete with federal government issuing free credits to their Freddy Mac entity in the amount of 2 trillion

Instead of blaming speculators congress should heed their warning and here is why…. If you look at the total open interest in a commodity like oil, for example, about 50% comes from producers and 35% from physical consumers. About 10% of the remaining open interest comes from passive index investors and the remaining 5% from hedge funds and CTAs. The critical point here is that producers, consumers and index investors do not go in and out of these markets. An index investor buys oil and stays in it for five years. Hedge funds and CTAs have a big impact on daily volatility but not on long-term price trends. Commodity markets are physical markets, and what separates them from financial markets is that they are markets for spot assets as opposed to anticipatory assets like equities or bonds. The prices for spot assets are driven by spot conditions whereas the prices for anticipatory assets are driven mostly by expectations.

As for the increase in money invested in commodities… In 2006, when oil futures were in contango (or carry market for chicago), many blamed the high amount of passive long interest at the short end of the curve for the phenomenon. Despite the fact that investors continued to pour money into commodities in 2007, however, oil moved back in to backwardation (inverted) as inventories rose, making it clear that low inventories in the previous year, rather than investor cash, were the real cause for the shape of oil’s forward curve.

Additionally there is a VERY REAL demand for these finite resources. As a component of the food-versus-fuel debate, there is an economic principle known as “elasticity.” Simply defined, this means as incomes move up, food consumption and expenditures change. This is why small increases in income in heavily populated nations like India and China can have major impacts on commodity markets, especially those tied to protein. As meat and poultry consumption rises in Asia with increased incomes, a greater demand is triggered for corn and soybeans to feed beef, pork, and poultry. Holding all factors constant, projections indicate that 120 million metric tons more of pork and poultry will be needed by 2030. This means 110 million metric tons more of soybean meal, 140 million metric tons of soybeans, and 62 million hectares of land to grow these additional crops. China now consumes more poultry than the United States and is projected to consume 40 percent more poultry than the United States by 2030.

We can sit here and let the politicians point fingers at speculators, but it is the politicians that should be charged with neglecting the finite nature of our resources. Who is the largest single user of oil in the world? The US Department of defense. I’ll admit that speculators have contributed to a small portion of the price increase, but can you blame them for not trusting the greenback? If anything the government is responsible for failed fiscal policy that encourages people to put money in things like commodities that store value when they mistrust the dollar. Fiat money is only as good as its issuer……

Congress is just delaying the inevitable by placing blame on speculators. We are running fast to stay in place in terms of oil production, we need to look for alternate resources or let the price rise be the controller of consumption habits.

Besides, anyone remember the last time congress curtailed speculation in the futures markets? Answer: The onion market, that worked well…..

“To this day, fresh onion prices still cycle through extreme peaks and troughs. According to the USDA, the hundredweight price stood at $10.40 in October 2006 and climbed to $55.20 by April, as bad weather reduced crop yields. Then it crashed due to overproduction, falling to $4.22 by October 2007. In April of this year, it rebounded to $13.30.” -July 8th Wall Street Journal

May I kindly suggest you do a little research about commodities and the functions of futures markets before you label them as a casino and undermine their necessity.

As you stated, “To help make my point imagine if we traded wheat commodities and wheat jumped 100 percent so traders all jumped in and bought more driving the cost up even higher… soon the whole world would starve because wheat prices would skyrocket.”

In late February/early March the price of wheat traded at the CBOT had nearly tripled. U.S to over $13 a bushel. Hard red spring wheat, the wheat commonly used in breads, traded at the MGEX had risen to an all time high of $24 a bushel and equalled a 90% increase in price in just ONE MONTH.

Wheat stocks had hit there lowest level in 60 years and the harvest looked less and less promising, enter the speculator. Speculators took this information and bid up the price because of the low supply and growing demand and signaled the need for more wheat. Now when the farmers plan their acreage devotion to particular crops they look at the prices and say they will devote more to wheat to meet supply and demand. The USDA planned planting and acreage comes out and the numbers do signal farmers are going to plant more wheat and wheat trades limit down in one day. CBOT September wheat closed at 824 and a half cents last night, well off the $13 highs.

Now the problem with oil is if the market price signals for more you can’t just go out and plant more, you have to change consumption patterns or find new sources. It’s way to easy to cast the speculator as the “greedy” villain, that’s why congress is so apt to do so. You have a lot to learn about the futures market and you can’t get this information from nbc correspondents that interview democrats. I can see it in what you wrote, you are repeating all the rhetoric used by democrats in newspapers, magazines, and television interviews.

Oh and what do you think regulation of futures is? SPECULATION THAT IT WILL LOWER PRICES, the government wants to speculate on speculators?? It’s been done in the past and proven to cause more harm as it prevent people from effectively managing risk, I once again refer back to the onion market.

One thought that’s important to keep in mind (and may help some clear up their confusion about “speculation”) is that whenever you buy a stock that you think is a great deal to buy at a certain price, each share you buy is coming from someone else who thinks it’s a great price to sell at.

Of course, they may very likely have requirements different than yours for selling. A good example would be the seller needing liquidity (e.g. a mutual fund selling to meet payout requirements of its retire customers cashing out some funds), while you may be interested in being long in the market for 20+ years.

This discussion about evil speculators is misdirection: We need to not permit Congress from sneaking away from this very mess they created. Democratic policies and obstruction are the cause for the current crisis. The surge in Chinese, Indian, Indonesian, Malaysian, etc. demand had been expected for quite some time. A semester of macro economics would be all you’d need to have to predict this outcome. Do not let these irresponsible Congresspersons to get off the hook for the harm they’ve caused us all.

redherkey:Democratic policies and obstruction are the cause for the current crisis. The surge in Chinese, Indian, Indonesian, Malaysian, etc. demand had been expected for quite some time. A semester of macro economics would be all you’d need to have to predict this outcome. Do not let these irresponsible Congresspersons to get off the hook for the harm they’ve caused us all.

Can u be more specific? Tell us WHAT EXACTLY NEEDED NOW? in detail of course.

“Speculative bubbles do in fact exist and they roll through sectors of the financial markets every few years.”

Both statements are completely true. In recent years the tech bubble and the housing bubbles serve as painful reminders. The following argument does not follow, absent painstaking research that I am unaware of:

The tech bubble was caused by investors’ enthusiasm about the new Internet era, and the housing bubble was caused by cheap money made available by the Fed. You can probably make an argument that the Fed had a hand in the tech bubble as well. In neither case were futures markets significant factors. Sure, there are interest rate futures, but the bubbles were caused by people actually stepping up and buying actual buildings or actual stocks of promising companies.

Certainly the growing world economy explains a great part of the petroleum spike of the last several years, but the relatively healthy state of US inventories is a bit of a puzzle to me. If pressed to explain it I would say that because petroleum is fungible US markets will adjust to demand in the world marketplace from places like China and India, so our local supply conditions are overridden by the global market– but I am only somewhat confident about this answer. Anyone who could improve upon it would be making a contribution.

Then there is the observation that the amount of futures trading has risen spectacularly, so clearly futures must have added to deamand. This observation overlooks what has also been said here, that there are futures sellers as well as buyers. Consider that at some point there were no futures; but that later, oil producers, or farmers, realized that they could ensure the continuity of their businesses by using futures. Then at any later date the number of futures contracts would be infinitely greater. We would not expect an infinite increase in the price of oil or farm goods, because participants would have been drawn into the market on *both* the buy and sell sides.

Wheat Futures closed above $10 a bushel yesterday. That’s over half where it was siting this time last year. Please understand that the word speculation is defined in the dictionary and no one in this forum needs to be told what it means

All free markets are regulate to a degree. Energy is a vital commodity which has become susceptible to predatory manipulation. A number of strategies and technologies have come into play and are being used to creating pressure and artificial scarcity.

Ultimately the objective of the rules will change as the regulators create road blocks and the speculators contrive new ones. Does it mean we give up and thrown in the towel – just let the free market win. Why not just give Tony Soprano the keys to the store?

I’ve heard rumors that the Russian mafia and other Russian entities may be involved in using the futures options markets for oil to pump up oil’s price. It helps Russia immensely, and correspondingly hurts the United States.

Is Putin and his allies in other countries waging economic war against us?

Nyquist is writing about it for almost 20 years, but only now it SHOWED in the events that he is right

what worries the most is:
our politicians seem to now it but kinda hiding this from the public

oil trading is not transparent

credit markets are not transperent

fm&fm situation is FAR from being transperent

this secrecy in a so called open society is very suspicious and presents dangers to our REPUBLIC
IMHO

the only way out that i can see is in the public realization of what is going on and as a result of realizing of the nature of things may be some refreshing and positive grass root political initiative may emerge

The commodities markets are not a true supply and demand market. If diapers at Wal-Mart are in short supply they may go up slightly in price but the overall price is controlled by the supplier and the 2 or 3 reasonable markups of the middle men and what the consumer is willing to pay. If they don’t like the price they can look at another supplier who is independant of the pricing of supplier number 1 to keep prices reasonable and competitive.

Commodities on the other hand are not competitive but all go at the same price at a given time that has nothing to do with fact but pure speculation that supply might or might not dry up. And this doesn’t even have to be based on reality. An example of this is the price of crude jumped a couple of dollars on news that a russian pipeline shut down for repairs a couple of months ago. When you did the math that consider how much of the world supply this affected it came down to less than one tenth of one percent. For this miniscule amount the traders ran up the price of crude enough to run up prices at the pump twenty cents. If this had been an on the shelf non-commodity item at your local store it wouldn’t have affected anything, but since you were dealing with a speculative market that doesn’t actually reflect actual conditions everyone on the retail side got screwed.

The fact of the matter is that most commodities ARE Vegas style gambling that have very little to do with reality. Supply and Demand is not a good argument when you look at the current ACTUAL supply with the current ACTUAL demand statistics.

Comparing the prices of consumer goods, especially for diapers, to the prices of commodities is akin to comparing the former Soviet Union to the anarchist state of Sudan. As I mentioned in an above post, “Commodity markets are physical markets, and what separates them from financial markets is that they are markets for spot assets as opposed to anticipatory assets like equities or bonds. The prices for spot assets are driven by spot conditions whereas the prices for anticipatory assets are driven mostly by expectations.” You fully neglect the spot market for commodities where you can buy the physical product at spot (cash) prices. Most notably correlation studies have shown that the relation between the Journal of Commerce industrial commodity price index (JOC) and the CORE Consumer Price Index (CPI) is insignificant. A 10% year-over-year increase in the JOC has 13 months later added only 4 basis points to the year-over-year percent change in the core CPI.

Most importantly how can one compare the price of diapers to commodities? Are diapers subject to the myriad of stochastic variables that commodities are? If a flood hits and wipes out half of the corn crop they can’t just run into the field and plant more corn like they can produce more diapers if half the diaper delivery trucks explode. And I ask you which is more likely? There is a certain window for corn planting, the tassels need a certain amount of time to set in the ground for the crop to grow and produce acceptable yields. The same goes for oil and all other commodities; they are stochastic markets, subject to geopolitical and natural disasters that curb supply. That doesn’t even cover the aspect of demand. When the chance of supply interruptions rears its head amidst never before seen demand, the futures market prices it in because we can’t spare a drop of oil right now.

To me most irksome supposition made is when you or anyone suggests that commodities are not supply and demand markets. Forgive me for being coarsely blunt, but I am futures trader or commonly known as a villainous speculator, that suggestion is sheer lunacy. The holy grail of the grain markets is the USDA Supply and Demand reports, these reports no doubt have the greatest effects on the price of grain futures. Oil has reports from the IEA and investors look at strategic petroleum reserves and price in demand in slumping economies. You may say well the American economy is down and we are not going to use as much oil at these prices. However a recent IEA report states, “90% of global oil demand growth is in diesel-hungry Asia (especially China), South America and the Middle East.” In addition the same 97 page medium-term oil market report said that….
“While recognizing that speculation can have a day-to-day impact on price moves, the fact that all producers are working virtually flat out and that there is no sign of any abnormal stock build gives a strong indication that current oil prices are justified by fundamentals. Similarly, while high forward prices may reflect concerns about peak oil or sustained demand growth, they too could only impact spot prices if they started to create a forward price premium sufficient to encourage stock building. Often it is a case of political expediency to find a scapegoat for higher prices rather than undertake serious analysis or perhaps confront difficult decisions.”

You need to go back and read and understand the necessity of speculators; everyone does, including me. Southwest Airlines chose to hedge jet fuel by buying heating oil futures contracts and has effectively locked in 70% of it’s fuel at a price equivalent to $51 a barrel of crude oil. Who do you think provided the liquidity and even the sellers to allow Southwest to buy those contracts? SPECULATORS

Speculators are not gamblers; they are researchers who painstakingly pour over data of exports/imports, supply/demand all in the name of hoping to find the price of oil, corn, and other valued commodities. They are contributing to price discovery and providing liquidity and what should be a well-valued opinion. To limit speculation would be to say that the majority opinion is the least valuable. If that is the case then why does the government spend money on campaigns to encourage voting?

You know it’s funny my dad told me a story, a while back when he was walking up to the Chicago Board of Trade for work there was a group of farmers protesting with a sign that said “CBOT=Vagas”. Of course he got a chuckle that misspelling Vegas immediately diminished their credibility as protesters. But do you know what they were protesting? Low corn prices, they thought too many speculators and traders were purposely driving the price of corn too low.

I think it is important that everyone mention their careers along with a post, it might give an indication as to why they have directed their opinion the way they did. I am a futures trader but I promise I leave my bias at the door, I just look at facts and realities. You can’t use your emotions to trade, if I did I would be short oil at $90.

Casey

Son of a futures trader, futures trader, and just like the author “speculator”

Wheat did not close over $10 the other day. The price for September wheat, the closest delivery month and currently most traded, settled at 7920 ($7.92). While the 7920 price is well above historic prices, understand that amid 60 year wheat supply lows and increasing demand this price is in line if not cheap. For future reference use this for better wheat quotes. Visit the cbot website

Wheat did not close over $10 the other day. The price for September wheat, the closest delivery month and currently most traded, settled at 7920 ($7.92). While the 7920 price is well above historic prices, understand that amid 60 year wheat supply lows and increasing demand this price is in line if not cheap. For future reference use the CBOT site provides accurate wheat quotes

Comparing the prices of consumer goods, especially for diapers, to the prices of commodities is akin to comparing the former Soviet Union to the anarchist state of Sudan. As I mentioned in an above post, “Commodity markets are physical markets, and what separates them from financial markets is that they are markets for spot assets as opposed to anticipatory assets like equities or bonds. The prices for spot assets are driven by spot conditions whereas the prices for anticipatory assets are driven mostly by expectations.” You fully neglect the spot market for commodities where you can buy the physical product at spot (cash) prices. Most notably correlation studies have shown that the relation between the Journal of Commerce industrial commodity price index (JOC) and the CORE Consumer Price Index (CPI) is insignificant. A 10% year-over-year increase in the JOC has 13 months later added only 4 basis points to the year-over-year percent change in the core CPI.

Most importantly how can one compare the price of diapers to commodities? Are diapers subject to the myriad of stochastic variables that commodities are? If a flood hits and wipes out half of the corn crop they can’t just run into the field and plant more corn like they can produce more diapers if half the diaper delivery trucks explode. And I ask you which is more likely? There is a certain window for corn planting, the tassels need a certain amount of time to set in the ground for the crop to grow and produce acceptable yields. The same goes for oil and all other commodities; they are stochastic markets, subject to geopolitical and natural disasters that curb supply. That doesn’t even cover the aspect of demand. When the chance of supply interruptions rears its head amidst never before seen demand, the futures market prices it in because we can’t spare a drop of oil right now.

To me most irksome supposition made is when anyone suggests that commodities are not supply and demand markets. Forgive me for being coarsely blunt, but I am futures trader or commonly known as a villainous speculator, that suggestion is sheer lunacy. The holy grail of the grain markets is the USDA Supply and Demand reports, these reports no doubt have the greatest effects on the price of grain futures. Oil has reports from the IEA and investors look at strategic petroleum reserves and price in demand in slumping economies. You may say well the American economy is down and we are not going to use as much oil at these prices. However a recent IEA report states, “90% of global oil demand growth is in diesel-hungry Asia (especially China), South America and the Middle East.” In addition the same 97 page medium-term oil market report said that….
“While recognizing that speculation can have a day-to-day impact on price moves, the fact that all producers are working virtually flat out and that there is no sign of any abnormal stock build gives a strong indication that current oil prices are justified by fundamentals. Similarly, while high forward prices may reflect concerns about peak oil or sustained demand growth, they too could only impact spot prices if they started to create a forward price premium sufficient to encourage stock building. Often it is a case of political expediency to find a scapegoat for higher prices rather than undertake serious analysis or perhaps confront difficult decisions.”

You need to go back and read and understand the necessity of speculators; everyone does, including me. Southwest Airlines chose to hedge jet fuel by buying heating oil futures contracts and has effectively locked in 70% of it’s fuel at a price equivalent to $51 a barrel of crude oil. Who do you think provided the liquidity and even the sellers to allow Southwest to buy those contracts? SPECULATORS

Speculators are not gamblers; they are researchers who painstakingly pour over data of exports/imports, supply/demand all in the name of hoping to find the price of oil, corn, and other valued commodities. They are contributing to price discovery and providing liquidity and what should be a well-valued opinion. To limit speculation would be to say that the majority opinion is the least valuable. If that is the case then why does the government spend money on campaigns to encourage voting?

You know it’s funny my dad told me a story, a while back when he was walking up to the Chicago Board of Trade for work there was a group of farmers protesting with a sign that said “CBOT=Vagas”. Of course he got a chuckle that misspelling Vegas immediately diminished their credibility as protesters. But do you know what they were protesting? Low corn prices, they thought too many speculators and traders were purposely driving the price of corn too low.

I think it is important that everyone mention their careers along with a post, it might give an indication as to why they have directed their opinion the way they did. I am a futures trader but I promise I leave my bias at the door, I just look at facts and realities. You can’t use your emotions to trade, if I did I would be short oil at $90.

Comparing the prices of consumer goods, especially for diapers, to the prices of commodities is akin to comparing the former Soviet Union to the anarchist state of Sudan. As I mentioned in an above post, “Commodity markets are physical markets, and what separates them from financial markets is that they are markets for spot assets as opposed to anticipatory assets like equities or bonds. The prices for spot assets are driven by spot conditions whereas the prices for anticipatory assets are driven mostly by expectations.” You fully neglect the spot market for commodities where you can buy the physical product at spot (cash) prices. Most notably correlation studies have shown that the relation between the Journal of Commerce industrial commodity price index (JOC) and the CORE Consumer Price Index (CPI) is insignificant. A 10% year-over-year increase in the JOC has 13 months later added only 4 basis points to the year-over-year percent change in the core CPI.

Most importantly how can one compare the price of diapers to commodities? Are diapers subject to the myriad of stochastic variables that commodities are? If a flood hits and wipes out half of the corn crop they can’t just run into the field and plant more corn like they can produce more diapers if half the diaper delivery trucks explode. And I ask you which is more likely? There is a certain window for corn planting, the tassels need a certain amount of time to set in the ground for the crop to grow and produce acceptable yields. The same goes for oil and all other commodities; they are stochastic markets, subject to geopolitical and natural disasters that curb supply. That doesn’t even cover the aspect of demand. When the chance of supply interruptions rears its head amidst never before seen demand, the futures market prices it in because we can’t spare a drop of oil right now.

To me most irksome supposition made is when anyone suggests that commodities are not supply and demand markets. Forgive me for being coarsely blunt, but I am futures trader or commonly known as a villainous speculator, that suggestion is sheer lunacy. The holy grail of the grain markets is the USDA Supply and Demand reports, these reports no doubt have the greatest effects on the price of grain futures. Oil has reports from the IEA and investors look at strategic petroleum reserves and price in demand in slumping economies. You may say well the American economy is down and we are not going to use as much oil at these prices. However a recent IEA report states, “90% of global oil demand growth is in diesel-hungry Asia (especially China), South America and the Middle East.” In addition the same 97 page medium-term oil market report said that….
“While recognizing that speculation can have a day-to-day impact on price moves, the fact that all producers are working virtually flat out and that there is no sign of any abnormal stock build gives a strong indication that current oil prices are justified by fundamentals. Similarly, while high forward prices may reflect concerns about peak oil or sustained demand growth, they too could only impact spot prices if they started to create a forward price premium sufficient to encourage stock building. Often it is a case of political expediency to find a scapegoat for higher prices rather than undertake serious analysis or perhaps confront difficult decisions.” – International Energy Agency

You need to go back and read and understand the necessity of speculators; everyone does, including me. Southwest Airlines chose to hedge jet fuel by buying heating oil futures contracts and has effectively locked in 70% of it’s fuel at a price equivalent to $51 a barrel of crude oil. Who do you think provided the liquidity and even the sellers to allow Southwest to buy those contracts? SPECULATORS

Speculators are not gamblers; they are researchers who painstakingly pour over data of exports/imports, supply/demand all in the name of hoping to find the price of oil, corn, and other valued commodities. They are contributing to price discovery and providing liquidity and what should be a well-valued opinion. To limit speculation would be to say that the majority opinion is the least valuable. If that is the case then why does the government spend money on campaigns to encourage voting?

You know it’s funny my dad told me a story, a while back when he was walking up to the Chicago Board of Trade for work there was a group of farmers protesting with a sign that said “CBOT=Vagas”. Of course he got a chuckle that misspelling Vegas immediately diminished their credibility as protesters. But do you know what they were protesting? Low corn prices, they thought too many speculators and traders were purposely driving the price of corn too low.

I think it is important that everyone mention their careers along with a post, it might give an indication as to why they have directed their opinion the way they did. I am a futures trader but I promise I leave my bias at the door, I just look at facts and realities. You can’t use your emotions to trade, if I did I would be short oil at $90.

i am in mathematics, computer systems and engineering, also in the 2nd generation
also in underground resistance to communism in ussr and all over the world since mid 80s and to this day, which made me a student of strategy and other things to that matter

well, u as a trader deal with open sources,

but mind that our enemy who posses the majority of oil-n-gas reserves are not transparent AT ALL

1. You may be an “intelligent” trader but the fact of the matter is that commodities trading in general is gambling just like Vegas because many of these “reports” while stating current issues still rely on speculation as to what will happen 2 months down the road and this type of trading is a “clique” that is difficult for outsiders to get into. Most people have the image of college grads looking over spreadsheets then making decisions. Chicago Mercantile may be a little different than most but most of the commodity traders at other exchanges are more gambler types than educated professorial types.

2. If you say that commodities don’t compare well to other types of goods. I can be intellectualy honest and agree with you on that. But if that is the case then they need different types of safe guards to prevent abuses that usually end up being paid for by the end consumer. In the free market there are still laws against price gouging under emergency circumstance and the old let the free market work it thing doesn’t wash in that circumstance.

I believe in the free markets as long as the consumer has the ability to affect the price and truly has the ability to walk away if he doesn’t want to pay. Unfortunately, most “commodities” are essential to living like food or getting to work like fuel so the market has the consumer by the throat-he just can’t walk away if the price is more than he can bear.